Samsung has posted a 20% drop in net profit in its latest earnings report. The South Korean company also announced the worst performance by its smartphone business since the second quarter of 2012, as it struggled to fend off increased competition.
Samsung reported 6.25 trillion won (around $6.1 billion) in net profit and 52.35 trillion won ($51 billion) in sales. In addition to increased competition from the Chinese manufacturers, Samsung also blamed the strong Korean currency, which in early July reached a 6-year high against the USD, an uptick in production costs for the Galaxy S5, and increased marketing expenses. It marks the company’s third straight quarter of declining profits.
While disappointing, the results are consistent with the earnings guidance Samsung put forth at the beginning of the month. The drop in profits also comes on the heels of a heart attack suffered by Chairman Lee Kun Hee in May, which left him hospitalized and the company’s succession plan in question.
IDC estimates that Samsung experienced a 7% decline in its global smartphone market share from last year. It now owns just over 25% of the market, and is followed by Apple (11%), Huawei (6.9%), Lenovo (5.4%), and LG (4.9%).
The second half of the fiscal year presents its own set of challenges. Apple has solidified its footing in the high-end smartphone market, and is preparing to launch the iPhone 6, with Chinese suppliers set to go to work in the beginning of August. The rumored 5.5 inch screen (compared to the iPhone 5’s 4-inch) could undercut sales of Samsung’s large screen devices, like the 5.7 inch Samsung Note.
Chinese manufacturers such as Huawei and Lenovo have also cut into Samsung’s profits. The two companies enjoyed annual market share growth of 95.1% and 38.7%, respectively. A relative newcomer, Xiaomi Corp., meanwhile, recently released the Redmi Note, a smartphone with many of the same features as the Samsung Galaxy that retails for $130. According to Counterpoint Technology Market Research, the Redmi was the most sold phone in China in April.
Samsung admitted that the industry has shifted in the last two years, perhaps away from the conditions that favored the company’s impressive run of massive profitability. “Prospects for growth remain unclear as competition over global market share intensifies in the mobile industry. Samsung expects to see its sales of mobile devices increase with the rollout of flagship products and new models, but profitability may suffer due to a heated race over price and product specifications,” read the press release that accompanied the earnings report.
Samsung’s response will be to release new products. Two high-end smartphones are set to be unveiled within the next six months, while the company also announced the launch of its budget offerings – the Galaxy Star 2, Galaxy Star Advance and Galaxy Ace NXT – in India.
These are worrying times for Samsung and the next few product launches have now become crucial to the company’s future.